Posts pertinent to the entrepreneurial economy. From 2016 onward, focused more on private securities offering exemptions and topics related to startup and emerging company financing.

Why It's Important for Kickstarter to Not Overreact to Failure

I admire Kickstarter. Its success to date raises the bar for what
web-enabled networking should aspire to accomplish. When you consider
the mendacity of Facebook, Klout and all those who would twist potential means of empowerment into affiliate marketing, you have to hope that
Kickstarter, Etsy and more like them will continue to succeed.

Walk with me through the following question and answer, one of the new FAQs posted by Kickstarter this week under an "Accountability" header:

"What should creators do if they're having problems completing their project?

"If problems come up, creators are expected to post a Project Update (which is emailed to all backers) explaining the situation. Sharing the story, speed bumps and all, is crucial. Most backers support projects because they want to see something happen and they'd like to be a part of it. Creators who are honest and transparent will usually find backers to be understanding.

"It's not uncommon for things to take longer than expected. Sometimes the execution of the project proves more difficult than the creator had anticipated. If a creator is making a good faith effort to complete their project and is transparent about it, backers should do their best to be patient and understanding while demanding continued accountability from the creator.

"If the problems are severe enough that the creator can't fulfill their project, creators need to find a resolution. Steps could include offering refunds, detailing exactly how funds were used, and other actions to satisfy backers."

Substitute "founder" for "creator" and "angel investor" for "backer," and all but the last paragraph might be used, verbatim, by a startup mentor,
experienced angel investor, board director or seasoned lawyer in coaching a startup founder on best practices for dealing with investors.

The third paragraph, that's where Kickstarter takes a wrong turn. You would never make such a broad, open promise in an equity financing context (crowdfunding or otherwise).

You wouldn't tell the investors they would get a refund.

You wouldn't do it because you
then implicitly de-legitimatize the possibility of failure.

It may be that the guarantee of delivery that Kickstarter - meaning well, of course - wants creators to promise is reasonable when projects don't involve hardware, software or feats of cutting edge engineering. If you promise a t-shirt, surely you can deliver a t-shirt.

But some projects are as ambitious as those undertaken by startup companies seeking seed financing from angels. The possiblity that they may fail is part of what makes the projects worth attempting. Assuming backers knew the risks, shouldn't backers share in responsibility for failure, too, to the extent of their investment?

Some points for Kickstarter to consider, as alternatives to the well-meant but unworkable approach they've announced this week:

Further bifurcate cottage-industry art projects (films, albums,
performances) from design and software projects and continue to curate different standards
for the inherently different risk profiles.

Limit the amount of money that can be raised, either in the
aggregate, or per backer (this would be to take a page from the equity
crowdfunding model, arguably).

Double-down on reputational stakes – score the reputation of someone coming back to Kickstarter a
second time.

Develop a process for creators to distinguish between promises that should not be broken - access to the creative team, a musical recording, a t-shirt - with ambitious targets that may not be met. Anything reasonably in the category of the aspirational / contingent / subject to factors outside our knowledge or control, those should be identified as subject to risk of non-delivery or to failure.

See also Shahini's follow up blog post. Yours truly is quoted in the post to the same effect as the above.